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Cairn India (CAIR)
Energy
In-line quarter; use of cash key. Cairn reported largely in-line results with net income
at `22.6 bn (+6.8% qoq and +12.5% yoy) versus our estimate of `21.9 bn. In our view,
upside to the stock will come from (1) potential upgrades to reserves, production and
(2) value-creation from large FCF. We believe use of cash will be important—reinvestment
in value-accretive E&P opportunities will be treated positively, dividends as
neutral while loans to Group entities will be construed negatively by the market.
Good steady performance; 3QFY12 net income helped by lower tax rate
Cairn reported 3QFY12 EBITDA at `25.5 bn (+21% qoq and -0.7% yoy), marginally ahead of our
`24.7 bn estimate. The qoq improvement in EBITDA despite stable production reflects prior-period
royalty adjustment of US$89 mn in 2QFY12. Pre-tax profits at `23.8 bn were lower than our
estimated `25.6 bn due to (1) lower other income at `4.1 bn (-`1.5 bn) and (2) higher exploration
cost at `1.8 bn (+`1.3 bn). However, the reported net income of `22.6 bn was helped by lower
effective tax rate of 5% in 3QFY12. Crude price realization was modestly lower qoq at
US$101.1/bbl (-1.7% qoq); production was stable qoq. The management has maintained its
guidance of achieving production of 175,000 b/d at its Rajasthan block by end-FY2012E.
Potential correction in crude oil prices may impact stock performance
We see downside risks arising from potential correction in crude oil prices from current levels. We
note that the Cairn stock price has historically shown a high correlation to crude oil prices except
for the period after the announcement of the CNE-VED deal (see Exhibit 2). We see downside risks
to crude oil prices given recent deterioration in global oil demand; global supply-demand balance
looks comfortable in CY2012-13E (see Exhibit 3). Our reverse valuation exercise suggests that the
Cairn stock is discounting US$89/bbl crude oil price in perpetuity (see Exhibit 4).
Upgrade to reserves will be positive; new 12-month DCF-based TP `355 (`350 previously)
We maintain our REDUCE rating on the stock given the stock is trading near our 12-month DCFbased
target price of `355 (`350 previously). Key upside risk stems from any announcement of
potential upgrade to reserves and production in the Rajasthan block. We model recoverable
reserves of 1.46 bn bbls versus management guidance of 1.15 bn bbls for the key Rajasthan block.
Fine-tune earnings; use of cash will be key
We have revised our FY2012-14E EPS to `45.7 (-2.1%), `62.7 (+7.6%) and `51.9 (+5.9%) to
reflect (1) 3QFY12 results, (2) higher crude production in FY2013-14E, (3) higher capex for
FY2013-14E, (4) lower effective tax rate and (5) other minor changes. Key downside risks to
earnings stem from delay in ramp-up of crude production from the Rajasthan block. We note that
Cairn will be in a position to pay out dividends after its ongoing reorganization is complete.
Details of 3QFY12 results and other operational update
Exhibit 1 gives highlights of Cairn’s 3QFY12 results and compares the same with 2QFY12
and 3QFY11. We discuss key highlights below.
Increase in EBITDA led by weaker Rupee. Cairn India reported 3QFY12 consolidated
net revenues at `31 bn (+16.8% qoq and flat yoy) and EBITDA at `25.5 bn (+21% qoq
and -0.7% yoy). The qoq increase in EBITDA reflects (1) prior-period royalty adjustment of
US$89 mn in the previous quarter and (2) higher crude price realizations in Rupee terms.
Gross production from Rajasthan block remained steady qoq at 125,122 b/d (gross basis).
Crude price realization was modestly lower qoq at US$101.1/bbl (-1.7% qoq) for the
company and US$100.3/bbl (-1.3% qoq) for the Rajasthan block. The discount to Dated
Brent was lower at 8.3% for the crude oil sales from the Rajasthan block. Gas price
realization was at US$4.4/mcf versus US$4.5/mcf in 2QFY12.
Production remains steady for Rajasthan block. Cairn’s share of production from the
Rajasthan block was at 87,585 boe/d (working interest-basis) in 3QFY12 versus 87,676
boe/d in 2QFY12. At CB-OS-2, gas production remained flat qoq and oil production
declined 11% qoq. At Ravva, oil production declined by 2.6% qoq and gas production
increased by 12.7% qoq.
Decline in other income. Cairn’s other income declined to `4.1 bn from `5.9 bn in
2QFY12 led by lower foreign exchange fluctuation gain of `3 bn versus `5.3 bn in
2QFY12. Foreign exchange fluctuation gain was lower qoq due to payment of
certain US Dollar-denominated liabilities in 3QFY12.
Decline in finance charges. Cairn India reported a decline in finance cost to `240
mn from `1.23 bn in 2QFY12. Higher finance cost in 2QFY12 reflects one-time
charge of `0.83 bn on repayment of foreign currency loans.
Increase in DD&A charges and exploration cost. Cairn reported DD&A expense at
`3.8 bn (+20.5% qoq). The qoq increase in DD&A expenses was on account of
exploration activities in the Sri Lanka block. The company also reported higher exploration
cost of `1.8 bn versus `389 mn in 2QFY12 due to write-off of `1.5 bn on account of
abandonment of third exploratory well in Sri Lanka. The management has guided DD&A
expenses to be ~US$8-10/bbl for the Rajasthan block in the long term.
Taxation. The effective tax rate for the company was 5% in 3QFY12 which reflects
availing of a MAT credit for `2.7 bn. The company booked a deferred tax asset of `61 mn
in 3QFY12 versus `0.2 bn in 2QFY12.
Earnings revision and key assumptions
We have fine-tuned our FY2012E, FY2013E and FY2014E EPS to `45.7, `62.7 and `51.9
from `46.7, `58.3 and `49 to reflect (1) 3QFY12 results, (2) higher crude production in
FY2013-14E, (3) higher capex for FY2013-14E, (4) lower effective tax rate and (5) other
minor changes. We discuss our key assumptions behind earnings estimates below.
Volumes. We model gross production from the Rajasthan block at 6.5 mn tons (130 kb/d)
for FY2012E, 9.5 mn tons (190 kb/d) for FY2013E and 10.5 mn tons (210 kb/d) for
FY2014E. We assume gross production of 1.46 bn bbls (1 bn bbls net to Cairn) over the
life of the field, which is higher versus management’s guidance of 2P reserves of 1.15 bn
bbls.
Crude oil price assumption. We model crude oil (Dated Brent) prices at US$113/bbl,
US$105/bbl and US$100/bbl for FY2012E, FY2013E and FY2014E. We assume FY2015E
crude price at US$90/bbl and an increase in crude prices by 2% in perpetuity beyond
FY2015E. We model US$10/bbl discount to Dated Brent for Cairn’s Rajasthan crude.
Exchange rate. We have assumed exchange rate for FY2012E, FY2013E and FY2014E at
`48.15/US$, `52.5/US$ and `51/US$. We model long-term exchange rate from FY2015E
onwards at `50/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
In-line quarter; use of cash key. Cairn reported largely in-line results with net income
at `22.6 bn (+6.8% qoq and +12.5% yoy) versus our estimate of `21.9 bn. In our view,
upside to the stock will come from (1) potential upgrades to reserves, production and
(2) value-creation from large FCF. We believe use of cash will be important—reinvestment
in value-accretive E&P opportunities will be treated positively, dividends as
neutral while loans to Group entities will be construed negatively by the market.
Good steady performance; 3QFY12 net income helped by lower tax rate
Cairn reported 3QFY12 EBITDA at `25.5 bn (+21% qoq and -0.7% yoy), marginally ahead of our
`24.7 bn estimate. The qoq improvement in EBITDA despite stable production reflects prior-period
royalty adjustment of US$89 mn in 2QFY12. Pre-tax profits at `23.8 bn were lower than our
estimated `25.6 bn due to (1) lower other income at `4.1 bn (-`1.5 bn) and (2) higher exploration
cost at `1.8 bn (+`1.3 bn). However, the reported net income of `22.6 bn was helped by lower
effective tax rate of 5% in 3QFY12. Crude price realization was modestly lower qoq at
US$101.1/bbl (-1.7% qoq); production was stable qoq. The management has maintained its
guidance of achieving production of 175,000 b/d at its Rajasthan block by end-FY2012E.
Potential correction in crude oil prices may impact stock performance
We see downside risks arising from potential correction in crude oil prices from current levels. We
note that the Cairn stock price has historically shown a high correlation to crude oil prices except
for the period after the announcement of the CNE-VED deal (see Exhibit 2). We see downside risks
to crude oil prices given recent deterioration in global oil demand; global supply-demand balance
looks comfortable in CY2012-13E (see Exhibit 3). Our reverse valuation exercise suggests that the
Cairn stock is discounting US$89/bbl crude oil price in perpetuity (see Exhibit 4).
Upgrade to reserves will be positive; new 12-month DCF-based TP `355 (`350 previously)
We maintain our REDUCE rating on the stock given the stock is trading near our 12-month DCFbased
target price of `355 (`350 previously). Key upside risk stems from any announcement of
potential upgrade to reserves and production in the Rajasthan block. We model recoverable
reserves of 1.46 bn bbls versus management guidance of 1.15 bn bbls for the key Rajasthan block.
Fine-tune earnings; use of cash will be key
We have revised our FY2012-14E EPS to `45.7 (-2.1%), `62.7 (+7.6%) and `51.9 (+5.9%) to
reflect (1) 3QFY12 results, (2) higher crude production in FY2013-14E, (3) higher capex for
FY2013-14E, (4) lower effective tax rate and (5) other minor changes. Key downside risks to
earnings stem from delay in ramp-up of crude production from the Rajasthan block. We note that
Cairn will be in a position to pay out dividends after its ongoing reorganization is complete.
Details of 3QFY12 results and other operational update
Exhibit 1 gives highlights of Cairn’s 3QFY12 results and compares the same with 2QFY12
and 3QFY11. We discuss key highlights below.
Increase in EBITDA led by weaker Rupee. Cairn India reported 3QFY12 consolidated
net revenues at `31 bn (+16.8% qoq and flat yoy) and EBITDA at `25.5 bn (+21% qoq
and -0.7% yoy). The qoq increase in EBITDA reflects (1) prior-period royalty adjustment of
US$89 mn in the previous quarter and (2) higher crude price realizations in Rupee terms.
Gross production from Rajasthan block remained steady qoq at 125,122 b/d (gross basis).
Crude price realization was modestly lower qoq at US$101.1/bbl (-1.7% qoq) for the
company and US$100.3/bbl (-1.3% qoq) for the Rajasthan block. The discount to Dated
Brent was lower at 8.3% for the crude oil sales from the Rajasthan block. Gas price
realization was at US$4.4/mcf versus US$4.5/mcf in 2QFY12.
Production remains steady for Rajasthan block. Cairn’s share of production from the
Rajasthan block was at 87,585 boe/d (working interest-basis) in 3QFY12 versus 87,676
boe/d in 2QFY12. At CB-OS-2, gas production remained flat qoq and oil production
declined 11% qoq. At Ravva, oil production declined by 2.6% qoq and gas production
increased by 12.7% qoq.
Decline in other income. Cairn’s other income declined to `4.1 bn from `5.9 bn in
2QFY12 led by lower foreign exchange fluctuation gain of `3 bn versus `5.3 bn in
2QFY12. Foreign exchange fluctuation gain was lower qoq due to payment of
certain US Dollar-denominated liabilities in 3QFY12.
Decline in finance charges. Cairn India reported a decline in finance cost to `240
mn from `1.23 bn in 2QFY12. Higher finance cost in 2QFY12 reflects one-time
charge of `0.83 bn on repayment of foreign currency loans.
Increase in DD&A charges and exploration cost. Cairn reported DD&A expense at
`3.8 bn (+20.5% qoq). The qoq increase in DD&A expenses was on account of
exploration activities in the Sri Lanka block. The company also reported higher exploration
cost of `1.8 bn versus `389 mn in 2QFY12 due to write-off of `1.5 bn on account of
abandonment of third exploratory well in Sri Lanka. The management has guided DD&A
expenses to be ~US$8-10/bbl for the Rajasthan block in the long term.
Taxation. The effective tax rate for the company was 5% in 3QFY12 which reflects
availing of a MAT credit for `2.7 bn. The company booked a deferred tax asset of `61 mn
in 3QFY12 versus `0.2 bn in 2QFY12.
Earnings revision and key assumptions
We have fine-tuned our FY2012E, FY2013E and FY2014E EPS to `45.7, `62.7 and `51.9
from `46.7, `58.3 and `49 to reflect (1) 3QFY12 results, (2) higher crude production in
FY2013-14E, (3) higher capex for FY2013-14E, (4) lower effective tax rate and (5) other
minor changes. We discuss our key assumptions behind earnings estimates below.
Volumes. We model gross production from the Rajasthan block at 6.5 mn tons (130 kb/d)
for FY2012E, 9.5 mn tons (190 kb/d) for FY2013E and 10.5 mn tons (210 kb/d) for
FY2014E. We assume gross production of 1.46 bn bbls (1 bn bbls net to Cairn) over the
life of the field, which is higher versus management’s guidance of 2P reserves of 1.15 bn
bbls.
Crude oil price assumption. We model crude oil (Dated Brent) prices at US$113/bbl,
US$105/bbl and US$100/bbl for FY2012E, FY2013E and FY2014E. We assume FY2015E
crude price at US$90/bbl and an increase in crude prices by 2% in perpetuity beyond
FY2015E. We model US$10/bbl discount to Dated Brent for Cairn’s Rajasthan crude.
Exchange rate. We have assumed exchange rate for FY2012E, FY2013E and FY2014E at
`48.15/US$, `52.5/US$ and `51/US$. We model long-term exchange rate from FY2015E
onwards at `50/US$.
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